Prof.
Lakshman Krishnamurthi considers the future of Asia's largest
economies, finding challenges for both India and China —
and for the United States

By
Aubrey Henretty

"The
20th century was the American century," says Lakshman
Krishnamurthi, the Kellogg School's A. Montgomery Ward
Professor of Marketing. The 19th, he adds, was perhaps European,
but a journey further into the past reveals a different distribution
of global wealth and glory. A thousand years ago, India and
China had been the world's richest nations for the previous
millennium. And Krishnamurthi says it would take more than
a couple centuries of Western prosperity to quell that kind
of inertia:

"Some
historians may look at the data and say the last thousand
years was a blip."

Krishnamurthi,
who travels annually to India, says that nation has changed
dramatically in the past 30 years. "I left India in 1975,"
he recalls. "There was nothing — nothing —
happening in India." Today, a booming tech sector, an
emerging middle class and an enormous, largely young population
have put India back on the map as a potential competitor with
neighboring China, whose gross domestic product has been rising
steadily since the early 1980s.

In
"India and China in the Asian Century," a paper
Krishnamurthi recently co-authored with research associate
Sugandha Khandelwal, he sets out to "compare India and
China and put them in context with the rest of the world."
He analyzes data from large-scale studies conducted by the
research arms of Morgan Stanley and Deloitte and concludes
that both nations will face significant economic challenges
in the coming decades.

China:
a land of contradictions

"China
has been growing, on average, about 9 percent per year for
the last 17 years," says Krishnamurthi. "That kind
of growth is going to put tremendous pressure on factory inputs."
In addition, the inevitable rising prices of global goods
will strain China's economy, of which 50 percent is tied up
in exports.

Despite
its economy's heavy reliance on exported goods, China is a
net importer with every nation but the United States, Krishnamurthi
says. Resource-poor China buys raw materials from most of
the world and uses those materials to manufacture finished
products, which it then sells primarily to the United States.

Another
of China's many economic paradoxes is the philosophy that
underlies the system. Though officially communist, China is
structured more like a capitalist nation than is India, which
for much of its history since independence in 1947 has embraced
socialism. "China is very top-down-driven," says
the Kellogg professor, a marketing strategist who joined the
school in 1980. "If they want to get something done,
they get it done. India cannot." Development moves more
slowly in India, he adds, because it's a democracy. In addition,
bureaucracy still remains prevalent, one vestige of its colonial
days during the British Raj. "You can't simply displace
workers like they're doing in China." Krishnamurthi is
certain that if the Indian government took such liberties,
its citizens wouldn't stand for it, and years of tedious litigation
would soon follow.

He
points to another quirk: "Chinese are very entrepreneurial
outside of China," he says. "Inside the country,
it's another story. Little guys have a very hard time. In
India, that's not true."

India's
next challenge

According
to Krishnamurthi, India's "little guys" have used
their greater access to outside funding to build an enormous
— but not scalable — retail sector. "It's
a country of mom-and-pop stores," he says. "Every
store is very small, and there are millions of them. It is
completely inefficient, and is a sector that has to modernize.Major players like Reliance and Bharti are getting
into it, but India is far behind China in this sector."

Without
major reforms, retail will not be a viable option for India's
youth, who will on average be wealthier and better educated
than their parents and will face fiercer competition from
their peers, who are many times more numerous. Krishnamurthi
says that as China's population ages (a result of its one-child
policy), India's large, young workforce could put India's
economy at a distinct advantage. But it will also pose new
challenges:

"The
challenge in India is, how do you find work for all those
people?" says Krishnamurthi. The answer is not simple,
but he believes it must include vast improvements to public
infrastructure.

"To
employ hundreds of millions of people in the next 20 years,
you need massive infrastructure investments which will spur
manufacturing," he says, adding that China is way ahead
of India in this respect, thanks to Beijing's prudent investment
in roads, railways, ports and airports throughout the nation.
"India is starting to recognize that their infrastructure
investment has been pretty poor. The country knows it has
to invest. The question is: How?"

Building
new infrastructure will be crucial but difficult for both
nations as the prices of essential goods continue to rise,
Krishnamurthi says. "These countries need to keep growing
to lift themselves out of poverty, so rising oil and food
prices are a serious setback." And as each nation grows,
neither is interested in hearing the word "pollution"
— especially not from veteran polluters in the West.
With a better standard of living nearly within reach for so
many of their citizens, both nations have responded to concerns
about global climate change largely by ignoring them, Krishnamurthi
says. "This is misguided of course, because both China
and India are destroying themselves in their rush to grow,
but the imperative in both countries is to improve the life
of their citizens."

In
some ways, says Krishnamurthi, China and India are learning
from each other. At the moment, India is faring better in
some sectors — tech support, for example — because
of its high percentage of English speakers. Not to be outdone,
the Chinese government has begun to mandate English instruction
in primary and secondary schools. "In 20 to 25 years,
it's unclear to me that India's [language] edge will be that
much."

Asked
which nation will be the ultimate economic victor, Krishnamurthi
doesn't equivocate.

"I
believe China will win," he says. "India will never
catch up to China in terms of GDP."

Short-term
problems, long-term solutions

Before
China can claim decisive victory, Krishnamurthi says, the
nation will have to address short-term problems related to
its public image and quality-control standards. "From
lead in toys to contaminated seafood to potentially contaminated
pharmaceutical products, this is a huge problem right now,"
he says, adding that the occasional shoddy-export scandal
is common in industries that grow faster than the regulatory
bodies overseeing them. "Will China address those problems?
Of course." If government officials don't act fast, he
adds, "their entire investment machine will start to
slow."

While
China and India vie for global economic supremacy, says Krishnamurthi,
business and government leaders in the United States will
have to grow accustomed to the idea that both nations will
be strong competitors for many years. If the United States
wants to stay competitive with China and India as their markets
boom, it must recognize and confront weak spots in its own
economy. One of the biggest, he observes, is the sorry state
of public education, particularly in math and science. A lack
of expertise in those two subjects, Krishnamurthi says, is
costing the nation jobs in science, engineering and technology
— industries in which India happily picks up the slack.
"This stuff about, 'We are going to bring the jobs back'
— it's nonsense. The jobs are not coming back."

"We
understand what the problem is, but — strangely, for
a country like the United States — we're not implementing
well," he says. What is needed, he contends, is a system-wide
overhaul — a focus on producing exceptional students
of the hard sciences at home and attracting even more from
abroad, an agenda that has political repercussions because
of the charged immigration issue. "If the best people
will not come here, what can we do?"

Krishnamurthi
believes the United States will rise to the challenge. "I
am optimistic about the U.S., long-term. I think we have a
short-term problem."